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Speculative Behavior and Heterogeneous Expectations: Theory and Evidence

  • Cheolbeom Park

    ()

    (National University of Singapore)

This paper demonstrates that the optimal willingness to pay for a stock is the payoff from holding the stock for one period when investors have different expectations, and that the willingness to pay can be represented as the sum of the expected present value of future dividends and the expected present value of the gap between the future equilibrium price and willingness to pay. This speculative behavior based on the awareness of heterogeneity in expectations is supported by the volatility test and the predictability of the dispersion in expectations across investors.

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File URL: http://www.fas.nus.edu.sg/ecs/pub/wp/wp0205.pdf
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Paper provided by National University of Singapore, Department of Economics in its series Departmental Working Papers with number wp0205.

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Length: 38 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:nus:nusewp:wp0205
Contact details of provider: Web page: http://www.fas.nus.edu.sg/ecs/index.html

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  1. Stephen Morris, 1996. "Speculative investor behavior and learning," Working Papers 96-5, Federal Reserve Bank of Philadelphia.
  2. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
  3. Takatoshi Ito, 1988. "Foreign Exchange Rate Expectations: Micro Survey Data," NBER Working Papers 2679, National Bureau of Economic Research, Inc.
  4. John Y. Campbell, 1990. "A Variance Decomposition for Stock Returns," NBER Working Papers 3246, National Bureau of Economic Research, Inc.
  5. Harrison, J Michael & Kreps, David M, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 323-36, May.
  6. Owen Lamont, . "Earnings and Expected Returns," CRSP working papers 345, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  7. Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
  8. Aditya Kaul & Vikas Mehrotra & Randall Morck, 1999. "Demand Curves for Stocks Do Slope Down: New Evidence From An Index Weights Adjustment," Harvard Institute of Economic Research Working Papers 1884, Harvard - Institute of Economic Research.
  9. Joseph Chen & Harrison Hong & Jeremy C. Stein, 2001. "Breadth of Ownership and Stock Returns," NBER Working Papers 8151, National Bureau of Economic Research, Inc.
  10. Elliott, Graham & ITO, TAKATOSHI, 1998. "Heterogeneous Expectations and Tests of Efficiency in the Yen/Dollar Forward Exchange Rate Market," University of California at San Diego, Economics Working Paper Series qt5wm0q8mz, Department of Economics, UC San Diego.
  11. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
  12. Mankiw, N.G. & Romer, D. & Shapiro, M.D., 1989. "Stock Market Forecastability And Volatility: A Statistical Appraisal," Papers 89-21, Michigan - Center for Research on Economic & Social Theory.
  13. Charles M. Jones & Owen A. Lamont, 2001. "Short Sale Constraints and Stock Returns," NBER Working Papers 8494, National Bureau of Economic Research, Inc.
  14. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
  15. John Y. Campbell & Robert J. Shiller, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," NBER Working Papers 2100, National Bureau of Economic Research, Inc.
  16. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
  17. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
  18. Andrew Ang & Geert Bekaert, 2001. "Stock Return Predictability: Is it There?," NBER Working Papers 8207, National Bureau of Economic Research, Inc.
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